equator principles ppt

www.environgrade.com

Project Finance & Equator Principles Compliance Framework

About The Equator PrinciplesSocial & Environmental Sustainability RatingsProject Appraisal Scheme

Socio-Environmental Corporate Governance

José Antônio Campos Chaves

http://www.equator-principles.com/index.shtml


Summary

1 - About The Equator Principles

1.1 - Equator Principles Financial Institutions (EPFI)

1.2 - Equator Principles Management Structure

1.3 - The 10 Equator Principles

2 - Social & Environmental Sustainability Rating

2.1 - Sustainability Market-Rating and Company Value Increase

2.2 - Equator Principles’ Social & Environmental Rating Framework

3 - Project Appraisal Scheme

3.1 - Early Project Review and Risk Categorization

3.2 - Project Social & Environmental Risk Assessment

3.3 - Action Plan

3.4 - Social & environmental Management Program


1 - About The Equator Principles

Project Finance, a method of funding in which the lender looks primarily to the quality of

revenues generated by a single project both as the source of repayment and as security for the

exposure, plays an important role in financing development throughout the world. Project

financiers may encounter social and environmental issues that are both complex and

challenging, particularly with respect to environment-intensive and natural sourced projects.

In June 2003, a group of major financial institutions adopted a set of voluntary guidelines known

as the ‘Equator Principles’ with the intention of creating an industry benchmarking for assessing

and managing environmental and social issues in the project finance sector.

The Equator Principles are based on the policies and guidelines of the International Finance

Corporation (IFC), the private-sector development arm of the World Bank. Their genesis was

partially an acknowledgment by financiers of their responsibility to promote responsible social

and environmental practices, particularly in emerging markets.


It was also recognition that responsible development makes commercial sense – environmental

and social controversies have the potential to affect the profitability of projects, increase

political risk and tarnish the reputations of those who promote and finance them.

The Equator Principles adopting Financial Institutions (EPFIs) have consequently incorporated

these Principles in order to ensure that the Project Finance processes are developed in a manner

that is socially responsible and reflect sound environmental management practices. By doing so,

negative impacts on project-affected ecosystems and communities should be avoided where

possible, and if these impacts are unavoidable, they should be reduced, mitigated and/or

compensated for appropriately. EPFI believes that adoption of and adherence to the Equator

Principles offers significant benefits to lenders, borrowers and local stakeholders through

borrowers’ engagement with locally affected communities.

These Principles are intended to serve as a common baseline and framework for the application

by each EPFI of its own internal social and environmental policies, procedures and standards

related to its project financing activities. EPFIs won’t provide loans to projects where the

borrower will not or is unable to comply with the Equator Principles standards.


1.1 - Equator Principles Financial Institutions (EPFI)

Argentina Banco Galicia France BNP Paribas Calyon

Societe Generale

Spain BBVA Caja Navarra La Caixa

Australia ANZ National Australia Westpac Banking

Denmark Eksport Kredit Sweden Nordea SEB

Chile CORPBANCA Germany Dresdner Bank HypoVereinsbank KfW IPEX-Bank WestLB AG

S. Africa Nedbank Group

Belgium Dexia Group Fortis KBC Bank N.V.

I taly Intesa Sanpaolo MCC

Switzerland Credit Suisse

Brazil Bradesco Brasil I taú Unibanco Real

J apan Mizuho SMBC Tokyo-Mitsubishi

United States Bank of America Citigroup Inc. J PMorgan Chase Wells Fargo

Canada BMO Canadian Imperial Manulife Royal Bank Scotiabank TD Bank Financial

The Netherlands

ABN AMRO Bank FMO ING Group Rabobank Group

United Kingdom

Barclays plc HBOS HSBC Group Lloyds TSB Standard RBS Norway DnB Nor

China Industrial Bank Oman BankMuscat Uruguay República Oriental

Costa Rica CIFI Portugal Espírito Santo Millennium BCP

Togo Financial Bank


1.2 - The Equator Principles Management Structure


1.3 - The 10 Equator Principles

Principle I Review and Categorization

Principle II Social and Environmental Assessment

Principle III Applicable Social and Environmental Standards

Principle IV Action Plan and Management System

Principle V Consultation and Disclosure

Principle VI Grievance Mechanism

Principle VII Independent Review

Principle VIII Covenants

Principle IX Independent Monitoring and Reporting

Principle X EPFI Reporting


Principle I Review and Categorization

When a project is proposed for financing, the Equator Principle Financial

Institution (EPFI) will, as part of its internal social and Environmental

review and due diligence, categorize such project based on the

magnitude of its potential impacts and risks in accordance with the

environmental and social screening Criteria of the International Finance

Corporation (IFC).

The first path of the EPFI is to categorize the proposed project in one of

the three socio-environmental risk level groups:

(A) significant,

(B) limited and

(C) minimal potential impacts.


Principle II Social and Environmental Assessment

For each project assessed as being either Category A or Category B, the

borrower has to conduct a Social and Environmental Assessment process

to address, as appropriate and to the EPFI’s satisfaction, the relevant

social and environmental impacts and risks of the proposed project.

The assessment should also propose mitigation and management

measures relevant and appropriate to the nature and scale of the

proposed project. If the impact analysis confirms potential impacts and

risks, clients should develop measures and actions to avoid, minimize,

mitigate, compensate for, or offset potential adverse social and

environmental impacts, or, in case of positive or beneficial impacts, to

enhance them. As a general principle for adverse social and environmental

impacts, the Assessment should focus on measures to prevent these from

occurring in the first place, as opposed to minimization, mitigation, or

compensation.


Principle III Applicable Social & Environmental Standards

The Assessment will refer to the then applicable IFC Performance

Standards and the then applicable Industry Specific Environmental,

Health and Safety (EHS) Guidelines. The Assessment will establish to a

participating EPFI’s satisfaction the project's overall compliance with, or

justified deviation from, the respective Performance Standards and EHS

Guidelines.

The Assessment will consider all relevant social and environmental risks

and impacts of the project, including the issues identified in Performance

Standards 2 through 8, and those who will be affected by such risks and

impacts. Applicable laws and regulations of the jurisdictions in which the

project operates that pertain to social and environmental matters,

including those laws implementing host country obligations under

international law, will also be taken into account.


Principle IV Action Plan and Management System

For all Category A and Category B projects, the borrower has prepared an

Action Plan (AP) which addresses the relevant findings, and draws on the

conclusions of the Assessment. The AP will describe and prioritize the

actions needed to implement mitigation measures, corrective actions

and monitoring measures necessary to manage the impacts and risks

identified in the Assessment.

Borrowers will build on, maintain or establish a Social and Environmental

Management System that addresses the management of these impacts,

risks, and corrective actions required to comply with applicable host

country social and environmental laws and regulations, and requirements

of the applicable Performance Standards and EHS Guidelines, as defined

in the AP.


Principle V

For all Category A and B projects, the government, borrower or third

party expert has consulted with project affected communities. The

process will ensure their free, prior and informed consultation and

facilitate their informed participation.

Assessment documentation and AP will be made available to the public

by the borrower for a reasonable minimum period. The borrower will take

account of and document the process and results of the consultation,

including any actions agreed resulting from the consultation. For projects

with adverse social or environmental impacts, disclosure should occur

early in the Assessment process and in any event before the project

construction commences, and on an ongoing basis.

Consultation and Disclosure


Principle VI

For all Category A and B projects, to ensure that consultation, disclosure

and community engagement continues throughout construction and

operation of the project, the borrower will, scaled to the risks and

adverse impacts of the project, establish a grievance mechanism as part

of the management system. This will allow the borrower to receive and

facilitate resolution of concerns about the project’s social and

environmental performance raised by individuals or groups from among

project-affected communities.

The borrower will inform the affected communities about the mechanism

in the course of its community engagement process and ensure that the

mechanism addresses concerns promptly and transparently, in a

culturally appropriate manner, and is readily accessible to all segments

of the affected communities.

Grievance Mechanism


Principle VII

For projects with issues that may pose significant adverse impacts and

risks, clients should consider retaining external experts to assist in the

conduct of all or part of the Assessment. These experts should have

relevant and recognized experience in similar projects and operate

independently from those responsible for design and construction. They

should be engaged early in the project’s development phase and, as

necessary, in the various stages of project design, construction, and

commissioning.

In some high-risk cases, IFC may require a panel of external experts to

advise the client and/or IFC. In addition, external experts are required in

certain defined circumstances, on issues concerning biodiversity

(Performance Standard 6), Indigenous Peoples (Performance Standard 7)

and cultural heritage (Performance Standard 8).

Independent Review


Principle VIII

An important strength of the Principles is the incorporation of covenants

linked to compliance. For Category A and B projects, the borrower will

covenant in financing documentation: (i) to comply with all relevant host

country social and environmental laws and regulations; (ii) to comply

with the AP during the construction and operation of the project; (iii) to

provide periodic reports in a format agreed with EPFIs, prepared by in-

house staff or third party experts; (iv) to decommission the facilities.

Where a borrower is not in compliance with its social and environmental

covenants, EPFIs will work with the borrower to bring it back into

compliance to the extent feasible, and if the borrower fails to re-establish

compliance within an agreed grace period, EPFIs reserve the right to

exercise remedies, as they consider appropriate.

Covenants


Principle IX

As an element of its Management System, the client will procedure to

monitor and measure the effectiveness of the management program. In

addition to recording information to track performance and establishing

relevant operational controls, the client should use dynamic

mechanisms, such as inspections and audits, where relevant, to verify

compliance and progress toward the desired outcomes. For projects with

significant impacts that are diverse, irreversible, or unprecedented, the

client will retain qualified and experienced external experts to verify its

monitoring information. The extent of monitoring should be

commensurate with the project’s risks and impacts and with the project’s

compliance requirements. Monitoring should be adjusted according to

performance experience and feedback. The client will document

monitoring results, and identify and reflect the necessary corrective and

preventive actions in the amended management program. The client will

implement these corrective and preventive actions, and follow up on

these actions to ensure their effectiveness.

Independent Monitoring and Reporting


2 - Social & Environmental Sustainability Rating

Corporate Sustainability rating paradigm is a business approach to create long-term shareholder

value by integrating opportunities and managing deriving-risks from economic, environmental

and social factors. Corporate strategists call this approach the triple bottom line whose

paradigm has been internationally broadened by both The Equator Principles and The Global

Compact initiatives.

Announced as new self-regulation mechanism to guide project finance decisions, The Equator

Principles, come to benchmark the financial industry on managing social and environmental

issues in project financing. Since then banks are conditioning industrial credit to a specific triple-

bottom-line compliance framework adoption by its clients.

The United Nations Global Compact is also a strategic policy initiative for businesses that are

committed in aligning their operations and strategies with ten universally self-regulatory

accepted principles in the areas of human rights, labor, environment and anti-corruptiom. By

doing so, business, can help ensure that markets, commerce, technology and finance advance

in ways that benefit economies and societies everywhere.


2.1 - Sustainability Market-Rating and Company Value Increase

In 1999, Before Equator Principles and Global Compact launching, the Down Jones Sustainability

Group Index (DJSGI) was created, from a partnership between the Swiss-based SAM

Sustainability Group and The New York Securities Exchange (NYSE). It has brought a new

paradigm called the first wave of sustainability.

The DJSGI then established a global benchmark in corporate sustainability by upgrading the

stock valuation methodology from the traditional economic value added to the triple bottom line

approach: rating from the economic, social and environmental perspectives.

DJSGI has also firstly frameworked a performance-oriented corporate governance key-indicators

for sustainability’s market-rating. It has made possible visualizing the investors’ willingness to

diversify their portfolios, by investing in companies committed to the concept of corporate

sustainability. It clearly evidenced the investors’ choice to pay a premium for the responsible

companies’ stocks as well.


Graphic 1 provides an unequivocal tracking-view that increasingly institutional investors such as

pension funds and the outperforming ones, have shifted towards adopting environmental and

social investment policies as making investment decisions. The 2003-2007 periods has clearly

demonstrated the Down Jones Sustainability Group Index effectiveness to incentive market

maturity reaching, as compared to the Dow Jones Industrial Average Index (DJI).

2003 2004 2005 2006 2007

DJ I

E1SGI

Graphic 1 – BenchmarkingDow Jones Sustainability Europe Composite Index (E1SGI) versus Dow Jones Industrial Average Index (DJI)

Source: Yahoo! Finance - http://finance.Yahoo.com


2.2 – Equator Principles’ Social & Environmental Rating Framework

The Equator Principles’ Social & Environmental Rating Framework integrally derives from the

International Finance Corporation Performance Standards witch was developed to

manage social and environmental risks and impacts and to enhance development opportunities.

Chart 1 shows the IFC’s Performance Standards on Social and Environmental Sustainability.

Together, they establish standards that the client is to meet throughout the life of an investment

an project financing by each Equator Principles Financial Institution (EPFI).

A set of other publicized management tools accompany Performance Standards on Social and

Environmental Sustainability. EPFI’s clients most useful are: (i) The Guidance Notes,

corresponding to the Performance Standards, offers helpful guidance on the requirements to

help clients improve project performance; (ii) The Environment & Social Review Procedure

(ESRP) outlines the process through which EPFI staff implement the Corporation’s commitment

to promoting projects that are socially and environmentally sustainable; (iii) The Environmental,

Health and Safety General Guidelines (EHS) offers technical references with general and

industry-specific examples of Good International Industry Practice (GIIP). .


Equator Principles

Performance

Standards

I-S&E Assessment and Management Systems

II-Labor and Working Conditions

III-Pollution Preven-tion & Abatement

IV-Community Health, Safety & Security

V-Land Acquisition & Resettlement

VI-Biodiversity Conservation

VII-Indigenous Peoples

VIII-Cultural Heritage

Chart 1 The IFC’s Performance Standards on Social & Environmental Sustainability

Source: IFC, April 30, 2006


3 - Project Appraisal Scheme

Project Identification

Company’s Legal & Finance Screening

Financial Preliminary Feasibility Study

Project Social & Environmental Risk Categorization

3.1- Early Project Review and Risk Categorization

Category A Category B Category C

Projects with potential

significant impacts : Forestry;

Oil & Gas; Mining & Metals;

Port Facilities; Energy

Generation & Transportation;

Waste Management Facilities;

Utilities; etc.

Projects with potential limited

impacts Pulp & Paper;

Cement; Food and Beverage

Processing; Tourism and

Hospitality Development;

Textile; Hospitals; etc.

Projects with minimal or no

social or environmental

impacts: Banking;

Software; etc.


3.2 - Project Social & Environmental Risk Assessment

.

When considering an over US$ 10 million Category A or B project, EPFI’s credit department will

submit a detailed screening from the S&E Analysis Department – see SMBC below example.

Source: Sumitomo Mitsui Financial Group Equator Principles procedures

During this process independent S&E

consultants are normally contracted

for the project social & environmental

assessment and rating.

Assessment report will indicate high

legal, community and material risks to

be managed or mitigated. Borrower

would prepare an Action Plan which

addresses the relevant findings, and

draws on the conclusions of the

Assessment.


3.3 - Action Plan

Where the client identifies specific mitigation measures and actions necessary for the project to

comply with applicable laws and regulations and to meet the requirements of Performance

Standards, the client will prepare an Action Plan. These measures and actions will reflect the

outcomes of consultation on social and environmental risks and adverse impacts and the

proposed measures and actions to address these, consistent with the requirements. The Action

Plan* may range from a brief description of routine mitigation measures to a series of specific

plans.

The Action Plan will: (i) describe the actions necessary to implement the various sets of

mitigation measures or corrective actions to be undertaken; (ii) prioritize these actions; (iii)

include the time-line for their implementation; (iv) be disclosed to the affected communities ;

and (v) describe the schedule and mechanism for external reporting on the client’s

implementation of the Action Plan.

_____________________* For example: Resettlement Action Plans, Biodiversity Action Plans, Hazardous Materials Management Plans, Emergency

Preparedness and Response Plans, Community Health and Safety Plans, and Indigenous Peoples Development Plans.


3.4 - Social & Environmental Management Program

Taking into account the relevant findings of the Social and Environmental Assessment and the

result of consultation with affected communities, the client will establish and manage a program

of mitigation and performance improvement measures and actions that address the identified

social and environmental risks and impacts. Management programs consist of a combination of

operational policies, procedures and practices. It may apply across the client’s organization, or to

specific sites, facilities, or activities. The measures and actions to address identified impacts and

risks will favor the avoidance and prevention of impacts over minimization, mitigation, or

compensation, wherever technically and financially feasible.

The management program will define desired outcomes as measurable events to the extent

possible, with elements such as performance indicators, targets, or acceptance criteria that can

be tracked over defined time periods, and with estimates of the resources and responsibilities for

implementation. Recognizing the dynamic nature of the project development and implementation

process, the program will be responsive to changes in project circumstances, unforeseen events,

and the results of monitoring.


José Antônio Campos [email protected]

São Paulo+55 11 3717-4188

Rio de Janeiro+55 21 3717-4188

Brasília+55 61 3717-1288

Belo Horizonte+55 31 3231-4688

Wilmington+1 302 482-8188

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